Resource Mobilisation in Indian Primary Capital Market; A Analysis

International Journal of Business Marketing and Management (IJBMM) Volume 5 Issue 5 May 2020, P.P. 81-86 ISSN: 2456-4559 www.ijbmm.com

Resource Mobilisation in Indian Primary Capital Market; A Analysis Dr.Shacheendran. V Dr.Shacheendran.V, Head& Assistant Professor, Post Graduate Department of Commerce, GPM Government College Manjeswaram, Kasaragod District, Kerala, India.671323 Abstract: Economic liberalisation, privatisation, foreign private participation, and various other waves provided new impetus to the capital market. Primary capital market /New issue market permits corporate to mobilise resources by issuing fresh securities (shares, debentures / bonds etc.). Such mobilisation may be attempted by various modes such as private placement, public issue by prospectus, offer for sale etc. The present paper attempts to evaluate the resource mobilisation by corporate from primary capital market in India Key words: Primary Capital Market , public issue, offer for sale, private placement.

I. Introduction The process of industrial development requires, interalia, the development of a capital market. The pace of economic development is conditioned among other things, by the rate of long-term investment and capital formation. The capital market should be capable of meeting the requirement of credit of the entrepreneurs. Capital market comprises of two- Primary market and secondary market. Secondary market or stock exchange is a market dealing (purchase and sale) of already issued securities. Hence, it is primary market, from which the corporate mobilises resources required for their reqirements. Primary capital market is also known a New Issue Market (NIM).

Meaning The New Issue Market(NIM) deals with the new securities market i.e. the securities that are offered to the investing public for the first time. Thus, thIS market makes available fresh securities for public subscription. The new issue market encompasses all institutions dealing in fresh claimS. The forms in which these claims created are equity shares, preference shares, debentures, right shares and deposits etc. It is a platform for raising finance to establish new enterprise and for expansion and diversification of existing units.

Features and importance New issue market deals with new securities, which are issued for the first time for public subscription.

It enjoys neither any tangible form nor any administrative organisational set up. It renders service to the lenders and borrowers of funds at the time of any particular operation. The services are taken up by banks, brokers etc.

Primary market provides a direct link between companies, which require new capital, and the investing public. Along with the secondary capital market, NIM plays an integral role in the capital market.

Instruments issued in the primary capital market include equity shares, preference shares, debentures and secured premium notes etc.

Players in the new issue market There are many players in the new issue market. The important among them are the following; 1) Merchant Bankers Merchant Bankers are the issue managers, lead managers, Co-managers to an issue. They are responsible to the company and Securities and Exchange Brand of India (SEBI).

2)

Registrars to the issue They undertake all the activities connected with the new issue management. They are appointed by the company in consultation with the merchant banker to the issue.

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Resource Mobilisation In Indian Primary Capital Market; A Analysis 3)

Collecting and/or co-ordinating Bankers Collecting banker collects the subscriptions. They may also collect information on subscriptions and co-ordinate the collection work.

4) Underwriters and brokers.

The underwriter promises to subscribe to a specified number of securities issued in the event of public not subscribing to the issue. If the issue is fully subscribed then there is no liability for the underwriter. Brokers along with a network of sub-brokers market the new issue.

5) Printers, advertising agencies and marketing agencies are other players involved in the new issue market operations In brief new issue market is primarily facilitates transfer of resources from savers to the users. While the savers include individuals and financial institutions like banks, insurance companies, the users are companies /corporates who have investment plans.

Methods of floating new issues Various methods, which are used in the floatation of securities in the new issue market are1.

Public issue 2.

Offer for sale 3.

Placement I Public Issue Under public issue method, the issuing company directly offers, to the general public/institutions, a fixed number of shares (or with green-shoe option) at a stated price through a document called prospectus. The prospectus contains particulars relating to the issuer and issue such as - Name of the company, address of its registered office, existing and proposed activities, authorised and proposed issue capital, dates of opening and closing the subscription list, name of brokers, underwriter, bankers,/ managers and the registrars to the issue.

Public issue method offers advantages such as – inviting a large section of the investing public, and wide dispersion of shares. However, it is an expensive method being the issuer has to incur expenses on printing of prospectus, advertisement, underwriting commission, legal charges and so on.

II Offer for Sale The offer for sale method consist of an out-right sale of securities through the intermediation of Issue Houses or share brokers. The shares are not offered to the public directly; instead it is done in two stages. The first stage is a direct sale by the issuing company to the Issue House and/or brokers at an agreed price. In the second stage, the intermediaries resell those securities to the ultimate investors. The Issue Houses or stockbrokers purchase the securities at a negotiated price and resell at a higher price. The advantage of this method is that the issuing company is relieved from the difficulties of printing and advertising of the issue and making allotment of shares to various applicants..

III Private placement Under this method, the Issue Houses or brokers buy the securities outright with the intention of placing them with their clients afterwards. The brokers would make profit in the process of reselling. The Issue Houses or brokers maintain their own list of clients and through customer contact, they sell the securities. .

Resource Mobilisation In The Primary Capital Market: Analysis And Findings

II.

Table 1.1 Resources Raised by corporate Sector (Rs. Crore) Year

Public Equity Issues**

Debt issues

Total Resource mobilisation (Debt + equity)

Share (%) of debt in total Resource mobilisation

1995-96

8882

12975

21857

59.4

1996-97

4671

25406

30077

84.5

1997-98

1132

32912

34045

96.7

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Resource Mobilisation In Indian Primary Capital Market; A Analysis

1998-99

504

46155

46658

98.9

1999-00

2975

59771

62746

95.3

2000-01

2479

56595

59074

95.8

2001-02

1082

50768

51850

97.9

2002-03

1039

53117

54156

98.1

2003-04

17821

52751

70572

74.8

**Includes offers for sale.

Source: prime Database Table 1.1 shows the resources mobilised by the corporates over the period from 1995–96 to 2002–02. It shows that the total amount of resources raised has been gradually increasing.. While in the year 1995–96 the amount was only Rs.21,857 Crores, it increased to Rs.54,156 Crores by the year 2002–03 or 148% increase. On an average, the companies mobilised Rs.45,058 Crores during the analysis period.

The table also shows that the debt sources constituted the significant portion of the total resource mobilisation. While in the year 1995-96, it was 59.4%. It increased to as high as 98.9% by the year 1998-99 and remained at above 90% on an average. Corporate have tapped 90.8% of the total resource mobilisation from the debt sources, over the analysis period during the period 1997-98 to 2002-03. This trend shows that the companies in India have been predominantly concentrating on debt sources for their capital requirements compared to equity sources. The extent of financial average, as a result, will increase. Equally sources tapped were, though in 1995 – 96 shown at 40.6% of the total resource mobilisation, it has been lowered to a meagre 1.9% by the year 2002-03

Resources mobilised from primary market

III.

(Rs.crores) Category –wise Total

Year No

Public

Amount

No

Issue type

Rights

Amount

No

Listed

Amount

No

IPOs

Amount

No

Amou nt

1993-94

1143

24372

773

15449

370

8923

451

16508

692

7864

1994-95

1692

27633

1342

21045

350

6588

453

11061

1239

16572

1995-96

1725

20804

1426

14240

299

6564

368

9880

1357

10924

1996-97

882

14276

751

11557

131

2719

167

8326

717

5959

1997-98

111

4570

62

2862

49

1708

59

3522

52

1048

1998-99

58

5587

32

5019

26

568

40

5182

18

404

1999-00

93

7817

65

6257

28

1560

42

5098

51

2719

2000-01

151

6108

124

5378

27

729

37

3385

114

2722

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Resource Mobilisation In Indian Primary Capital Market; A Analysis 2001-02

35

7543

20

6502

15

1041

28

6341

7

1202

2002-03

26

4070

14

3639

12

431

20

3032

6

1039

2003-04

57

23272

35

22265

22

1007

36

9630

21

13642

Source: Prime Data base Table 1.2 shows the resource mobilised from primary market in India.It shows that, from the year 1993-94 to 2002-03 resource mobilisation from primary market has been gradually decreasing. Though in 1993-94, Rs.24,372 Crores were mobilised by 2002-03, it plummeted to Rs.4070 crores, i.e. approximately 83% fall.

Similar decline can be observed in the number times resource mobilised, which declined from 1143 (1993-94) to 26 (2002 – 03). The average resource mobilisation from primary market during the analysis period has been Rs.12278 Crores.

Category wise analysis shows that public issues were more than the Right issues. While in 1993-94, 773 public issues, involving Rs.15,449 crores were made, compared to 370 rights issued involving Rs.8923 crores. Similar was the trend during the whole analysis period. By declining both, in 2002-03, the number of public issues were 14 mobilising Rs.3639 crores compared to 12 right issues mobilising meagre Rs.43 crores. The average public issues made over the analysis period from 1993-94 to 2002-03 was 461 issues involving Rs.9195 crores while that of right issues were 130 issues involving Rs.3083 crores.

An analysis into issue type shows that the listed companies issues have been declining . In 1993-94, listed companies made 451 issues involving Rs.16508 crores. However, it has been decreased to 20 issues consisting Rs.3032 crores.

Role of private placement

IV.

(Rs.crores)

Debt Issues

Share (%) of private placement in

Year Public Issues **

Private Placements

Total Debt

Total Resource Mobilisation

1995-96

2940

10035

77.3

45.9

1996-97

7015

18391

72.4

61.2

1997-98

1929

30983

94.1

91.0

1998-99

7407

38748

84.0

83.1

1999-00

4139

54701

92.1

87.8

2000-01

4139

52434

92.7

88.8

2001-02

5341

45427

89.5

87.6

2002-03

4693

48424

91.2

89.4

2003-04*

4323

48,428

91.8

68.6

* Provisional **Includes offers for sale.

Source: Prime Database

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Resource Mobilisation In Indian Primary Capital Market; A Analysis Table 1.3 shows the role of private placement method for floating issues in primary market in India. Being corporates predominantly raised debt resources, the evaluation has been done on the debt segment. The table shows that issuers have preferred private placement more compared to public issues (including offer for sale).

In 1995-96, while Rs.10,035 crores were mobilised through private placement mode, only Rs.2940 crores were mobilised through public issues. Similar situation can be observed throughout the analysis period. In 2002-03 public issues mode accounted only for Rs.4,693 while through private placement mode mobilised Rs.48,424 crores . The table reveals that in the total debt capital mobilised percentage of amount routed through private placement was 77.3% (in 1995-96) while it increased to 91.2% by 2002-03.

In the total resource mobilisation also private placement mode has been adopted significantly. While in 199596, 45.9% of the resource mobilisation was routed through private placement mode, it increased substantially to 89.4% by 2002-03. In brief, the analysis shows that in India private placement has been adopted as the most favourable mode for mobilising both debt and equity resources. By 2002-03, the average amount mobilised by listed companies were Rs.7233.5 crores . During 1993-94 to 1996-97 (cases of initial public offerings (IPOs)) were higher compared to the issues of listed companies. In 1993-94 IPOs were 692 in number mobilising Rs.7864 crores. However 1 Pos were decreased to 6 by 2002-03 mobilising meagre Rs.1039 crores. During the analysis period, the average number of IPO cases were 425 involving Rs.5045 crores.

V.

Resource Mobilisation In Private Placement Market (Rs. in Crores)

The table 1.4 shows that both private sector and public sector have been showing increasing dependence on private placement mode. Private sector, as the table shows, has used the private placement mode for 138 issues in 1997–98 that mobilised Rs.9202cr. By the year 2003-04 it increased to 578 issues mobilising Rs.14866 cr.

Similar up trend can be seen in the public sector also. Its dependence on private placement mode increased from 118 issues (for Rs.20896 cr.) (1997-98) to 222 issues (for Rs. 44349 cr.) (2003-04). In the private sector, financial institutions has mobilised Rs 9178 cr in 2003-04 from 291 issues; while non-financial institutions mobilised Rs. 5688 crore (287 issues). In the same year, public sector financial institutions mobilised Rs.25879 cr. (123 issues) while public sector financial institutions mobilised Rs. 18470 crore (from 99 issues). As a whole, the mobilisation through private placement market mode has increased from Rs. 30099 cr. (from 257 issues) of 1997-98 to Rs 59215 cr. (from 800 issues) by 2003-04.

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Resource Mobilisation In Indian Primary Capital Market; A Analysis

Conclusion

VI.

The present paper analysed the trends in resource mobilization in Indian primary market. While the total financial resources are vital for the survival and growth of entities, primary market, which provides the platform for their mobilisation, assumes greater importance.

In this new issue market, various players like merchant bankers, registrar to the issue, underwriters and so on operate. The methods of issue in primary market may be public issue, offer for sale or private placement.

While each method has its own merits and demerits, the analysis revealed that private placement has been the most favourably adopted method in India. While in 1995-96, 77.3% of the debt capital was mobilized through private placement; it was increased to 91.2% by 2002-03. Similarly, in the total resource mobilisation too, private placement mode has been the most preferred route; which was increased from 45.9% (in 1995-96) to 89.4% (by 2002-03).

The resources mobilised by the corporate have increased from Rs.21857 Cr (1995-96) to Rs.54156 Crores by 2002-03. Thus, it shows that quantum of mobilisation has been on increase. The analysis further shown that companies have been preferring debt sources more than the equity for their capital requirements.

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